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Insight

A UK carbon border adjustment mechanism?

Daniel Merlo
06/10/2021
The House of Commons Environmental Audit Committee (EAC) recently announced a new inquiry into a UK carbon border adjustment mechanism (CBAM). Business with international supply chains, particularly UK importers and manufacturers, should be aware of the potential regulatory implications in order to understand the impact of a new CBAM and effectively engage with the EAC's inquiry.
 
The EAC's inquiry follows a report it published in February 2021 entitled ‘Growing Back Better: Putting Nature and Net Zero at the Heart of the Economic Recovery’ in which it recommended that the Government investigate the merits of carbon border adjustments.

One of the UK's largest steel manufacturers was referred to in the report as being in favour of a carbon border tax to promote the local sourcing of materials and minimise offshore manufacturing where carbon footprints can be much larger.  Similarly, a large automobile association was quoted as being in favour of Government support given the industry's vulnerability to carbon leakage, which sees carbon intensive manufacturing taking place abroad where the carbon prices are lower.

The EAC's inquiry into a UK CBAM follows similar proposals for an EU CBAM which are currently under consideration by the European Parliament.  As explained in a Fieldfisher article earlier this year, the EU's proposals are part of the European Green Deal, which seeks to avoid EU companies moving carbon-intensive production outside of the EU to take advantage of lower prices. 

Under the EU CBAM, importers of goods into the EU will have to purchase carbon certificates from 2026 to offset any saving in carbon price that they have made by manufacturing the goods abroad.  This will effectively level the playing field for companies who manufacture their goods within the EU and pay higher carbon prices.

The EU proposals will mean that businesses face increased regulatory requirements when moving goods or services along the supply chains and across international borders.  These requirements fall most significantly upon EU importers who will need to:
 
  • Register themselves with the relevant authorities
  • Calculate the amount of carbon emissions embedded in the goods they import
  • Administer the purchase and surrender CBAM certificates to the relevant authorities
  • Submit annual CBAM declarations specify the total amount of carbon emissions embedded in the goods they imported during the previous calendar year, and the number of CBAM certificates surrendered, making up any shortfall

Under a UK CBAM, UK importers are likely to face similar administrative requirements, unless the UK's proposals for the operational functioning of its mechanism are radically different.

Some countries would be exempt from the EU CBAM altogether, including Ireland, Lichtenstein and Norway who participate in the EU's emissions trading system (ETS), and Switzerland which has linked its ETS to the EU's. The exemption applies because the carbon price between the countries is effectively equivalent. 

There are no current plans for the UK's ETS to be linked to the EU ETS, and therefore no exemption for UK goods being exported to the EU. 

Similarly, the lack of plans to link the UK and EU ETS means that there is no reason to consider at present that an exemption would apply for EU goods being imported into the UK under a UK CBAM. 
UK importers may therefore consider it to be in their interests for the UK's ETS to be linked to other emission trading schemes to enable an exemption to operate under the UK CBAM to minimise the regulatory burden they will face.

Manufacturers of goods outside the EU (including UK manufacturers) who export to the EU may take on the responsibility of calculating the carbon emissions embedded in their products to avoid the EU imposing default prices. This will happen if EU importers do not calculate the carbon emissions embedded in the goods they import, or do not do so properly, and be based on the worst performing 10% of EU producers.

Understanding the detail of the EU - and expected UK - proposals will help businesses to actively manage their supply chains and build on the potential opportunities or mitigate the risks of these proposals. 
 

Fieldfisher's International Trade Teams in London and Brussels can help you to understand the implications of the proposals for both the UK CBAM and the EU CBAM on your business, and forward plan for what is set to be a new set of regulatory challenges in the future.
 

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